House prices are high by global standards. But are they in bubble territory? Photo: Louie Douvis

Experts say house prices are not in bubble territory yet, but there are danger signs. The international Monetary Fund (IMF) says it is concerned about rising house prices around the world but it did not single out Australia.

But house prices are expected to be on the agenda when the IMF economists have their scheduled meeting in Australia in November.

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According to RP Data, house prices have risen by more than 5 per cent in Sydney over the past three months and by more than 6 per cent in Melbourne over the same period.

Whether those prices will continue to rise at an annualised rate of more than 20 per cent remains to be seen.

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The problem is that Australian house prices are already high by world standards. Most analysis compares prices with median income or rental yields. The result of those calculations is that Australian house prices are about 20 per cent higher than overseas house prices. The big boom in prices occurred between 1996 and 2003 when prices doubled.

Since then, Sydney house prices have moved only a little bit higher but the risk is the same as it has been for the past 10 years: unemployment rises sharply and overcommitted households become forced sellers. The level of housing debt to income remains high. In 1996 it was about 70 per cent, now it's about 150 per cent.

But unemployment, although rising, remains low and the banks report low levels of defaults. There is no obvious trigger that would cause house prices to crash. And the Australian housing market is different to most overseas markets.

Australia's population lives in a few relatively large cities. The release of land on the outskirts of our cities is constrained and immigration and demand remains strong. And the rules by which foreigners can buy real estate are relatively liberal. There is also the aspiration of Australians for home ownership. That means our market is dominated by lifestyle factors rather than purely investment factors, making buyers more prepared to pay more for a house than would a hard-headed investor.

However, some investors may be prepared to pay more because of negative gearing, which applies when the rent does not cover the interest costs and other expenses, and the shortfall reduces the investor's income on which tax has to be paid.

Other investments, such as shares, can be negatively geared but landlords claim about $40 billion year in tax deductions.

Perhaps one way of containing house price growth is to limit the losses that can be used to reduce income tax.

The concern is not so much where prices are now but what they will rise to. And remember, our banks are heavily exposed to residential property mortgages.